Trading the EUR/USD Currency Pair

Posted By Robert On Wednesday, February 5th, 2014 With 0 Comments

The EUR/USD Currency Pair is the most liquid pair in the world with the tightest prices. Most bank market makers are excellent at providing this pair, which we believe makes it a no brainer when trading. Liquidity is good and deep 24 hours a day†. It’s the best currency pair for doing large trades, as well as the best currency to scalp during Asian hours because of the low spreads. Most high frequency institutional systems that go for a few pips per trade generally use EUR/USD.

Some have argued that since Spain has been dragged into the sovereign fray the markets have been remarkably kind towards the euro. Yes it has fallen, but it has hardly been thrown off a cliff and is still higher than the low reached in June 2010 when the first Greek crisis gripped the markets. So why haven’t investors’ dumped the single currency and pushed it to parity or even lower versus the US dollar?

I believe there are two reasons for this:

Firstly, the markets tend to push volatility higher and the euro lower, which in turn causes EU officials to react. Hence EURUSD threatened to break 1.20 and Spanish and Italian bond yields started to surge and only at that moment did the ECB chief Mario Draghi, at a speech in London, hold out hope that the central bank would take more policy steps to ease the credit risk in Europe’s third and fourth largest economies. This sparked a relief rally and boosted investors’ appetite for the euro.

Thus, the euro seems to have avoided a ‘crisis’, as the markets expect the authorities to act and throw another lifeline through stimulative policy action to smooth over the cracks.

The next reason is more technical. When you have the world’s second largest currency coming under attack it will very rarely go down in a straight line due to the multitude of factors that influence it. The round number of 1.20 is a massive psychological level in EURUSD and as such it is likely to be respected by the market. So a rebound on the back of Draghi’s pledge to do whatever it takes to save the euro is perfectly normal. But it also means that Draghi has to deliver the goods. If he doesn’t, or there is any more cankicking by EU officials, then we could see another leg lower in the euro, and this time there may be no hesitation to push EURUSD below 1.20.

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